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What's in store for the Indian broadcast industry?

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MUMBAI: The Indian media and entertainment industry is on the cusp of growth with phase-III and IV digitisation underway. However, even as the government is optimistic about meeting digitisation deadlines, multiple stakeholders are of the opinion that to meet the 2016 yearend deadline is unrealistic and far-fetched to say the least.

Reiterating the sentiment is a research report by Bank of America-Merrill Lynch, which says that digitisation will be a slow process and will be complete only by FY2020-21. 

The Bank of America-Merrill Lynch lists out four things that the Indian media industry should watch out for. They are as follows:  

1) Digitisation: A Slow Process

Even though the government has mandated full digitisation by December 2016, the research says that digitisation will be a slow process as on-ground checks show that it is nearly impossible for stakeholders to stick to the deadline. Bank of America-Merrill Lynch expects the entire roll out to be complete only by FY2010-21, with bulk of the benefits flowing in FY’18-19.

Larger MSOs don’t have a local presence: In phase-I and II DAS-mandated areas, the large MSOs already had their infrastructure laid out and had knowhow of the local conditions. However, phase-III and IV are more remote areas where the MSOs do not have an established network, and hence will take time to rollout their network. These areas have been dominated by the local/ smaller MSOs, who may not have the wherewithal to invest capex and fund set-top-boxes (STB) for consumers. The report says that if digitisation happens slowly, the local MSOs will be able to capture this market (wherever analog cable is present), thus limiting the land grab of DTH operators.

Government has reasons to be ambivalent on digitisation: The government benefits from digitisation in way of increased tax collections. At the same time, it will be vary of making voters pay a higher tariff for Pay TV bills. The ARPUs for phase-III and IV areas are lower; and a move to digital TV will entail a significant rise in their pay TV bills. Considering that TV is the main source of entertainment for Indians, the government may look to ease the digitisation roll-out slowly, rather than sticking to tight deadlines.

ARPUs are lower: The phase-III and IV DAS-mandated areas have a lower ARPUs compared to phase-I and II geographies, which would make it difficult for MSOs and DTH companies to push through a premium ARPU product. As per the research, more innovations like Dish’s low-ARPU Zing proposition (focusing on low-cost local content), lower price points and differential geographical pricing to drive adoption are likely to be seen.

2) Ad revenue growth to be strong in FY2016

Advertisement revenues strong: Ad revenue growth is expected to be strong in FY16, on back of: 1) A pick up in economy and the resultant rise in ad spends; 2) Increased ad spending by e-commerce companies; and 3) Television maintaining its share of the advertisement pie. Ad spends have a strong correlation with nominal GDP. Considering that the economy is expected to pick up going forward, the Bank of America-Merrill Lynch report forecasts 13 per cent ad revenues growth for the industry, which is in line with industry estimates. (Source: KPMG-FICCI Annual report 2015).

Implementation of BARC: The prevalent industry TV rating data (TAM) has often been cited for inconsistencies by broadcasters and advertisers. Hence, the industry bodies representing the three key stakeholders - broadcasters, advertisers, and advertising and media agencies – launched a new rating system – BARC India. Since it has the support of the industry, the report suggests that it will eventually replace TAM as the industry standard for determining TV ratings. Given that the new rating uses different methodology and sample set, the status quo TV ratings is at a risk of being upset. Though Zee has managed to hold on to third spot among Hindi GECs in the recently released data, as BARC moves towards a countrywide coverage, volatility in future ratings will remain a concern.

Smart devices will lead to increasing viewership and ad revenues: With increasing penetration of smart devices, overall video consumption will increase. Since Indians are quite willing to watch ad-supported free content, the ad revenues will increase with the rise in online viewership.

3) DTH: Factoring ARPU hike for 2-3 years

Impending move to RIO to increase ARPUs: Star India has made the first move by completely moving its channel bouquets to RIO pricing, without materially impacting its viewership. Even as other broadcasters are still debating on whether to move to RIO, according to the Bank of America-Merrill Lynch report, Star’s successful move makes it only a matter of time before other broadcasters move to RIO pricing as well. Moving to RIO will increase the content cost for MSOs, necessitating an increase in tariffs to protect profitability. This does not factor in the RIO sing-ups in the base case. As per the report, an upside to subscription revenue estimates will be seen for both broadcasters and DTH operators in case market moves to RIO pricing.

Subscribers in low-ARPU areas may opt for ala carte subscription: Unlike in the West, regulation in India mandates broadcasters to make available their channels on a piece meal basis. Since the average Indian watched just 17 channels, there is a risk of consumers in the low ARPU phase-III and IV DAS- mandated areas shifting to subscribe on a per-channel basis to reduce their monthly bills.

Reduction in carriage and placement fees: Digitisation of Pay TV will reduce the carriage and placement fees (C&P fees) that are paid to MSOs for beaming their content. Digitisation mandates complete removal of the placement fees. Additionally, digitisation of the channel signals has resulted in a 3-4x decrease in the bandwidth needed to broadcast individual channels, allowing MSOs to beam as many as 2,000 channels within the allotted bandwidth, and thus weakening the case for MSOs to charge for a non-existent constraint. While the broadcasters are still paying carriage charges, the charges on a per-channel basis have been reducing. According to the report, this trend is expected to continue in the future.

HD channels to increase ARPUs: Subscription to HD channels have increased in recent months, due to: 1) HD content being made available; 2) Costs of HD STBs have fallen and the non HD boxes point that distributors have stopped procuring non-HD boxes; and 3) Penetration of HD-enabled television sets have increased. As per the estimates by Bank of America-Merrill Lynch, HD subscribers on an average have ARPUs higher by about Rs 100. And with the HD take-up increasing up to 22 per cent for the DTH operators, HD is expected to positively drive up ARPUs.

4) Fragmentation of channels & content costs

Ad cap and the fragmentation of channels: The government has recently implemented the 12-minute ad cap (per hour). As a result, the sector has seen a slew of new channel launches and increase in ad rates to offset the impact. The report expects that investment in new channel launches will continue in the near term.

Content to become increasingly more important: In a digitised world, quality content is going to be increasingly more important. With the likely kicking in of RIO pricing, and possible move to ala carte packages, broadcasters will need the content “hook” to lure the subscriber to pay a higher price for the same content.

Content costs to rise: As more channels compete for the revenue pie, and channels move to RIO pricing, broadcasters are likely to increase their investments to produce quality content. In this context, the larger broadcasters will be in a better place to cope with the change with them having deeper pockets to invest in new content.

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